AP Economics 1.1 - 1.3 Quiz

Economics (basic)

The science of scarcity, the study of choices (with using resources.)

Scarcity

we have unlimited wants but limited resources. since we are unable to have everything we desire, we must make choices on how we will use our resources.

Economics (textbook definition)

Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants. Study of how individuals and societies deal with scarcity.

Microeconomics

Study of small economic units such as individuals, firms, and markets (ex: supply and demand in specific industries, labor markets)

Macroeconomics

Study of large economy as a whole or economic aggregates (ex: economic growth, government spending, inflation, unemployment)

How is economics used?

theoretical economics and policy economics

Theoretical economics

Economists use the scientific method to make generalizations and abstractions to develop theories

Policy economics

Theories (theoretical economics) are applied to fix problems or meet economic goals

Positive statements

Based on facts, avoids value judgments (what is)

Normative statements

Includes value judgments (what ought to be)

1st key economic assumption

Society has unlimited wants and limited resources (scarcity)

2nd key economic assumption

Due to scarcity, choices must be made. Every choice has a cost (trade-off)

3rd key economic assumption

Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest"

4th key economic assumption

Everyone makes decisions by comparing the marginal costs and marginal benefits or every choice

5th key economic assumption

Real-life situations can be explained and analyzed through simplified models and graphs

marginal analysis

making decisions based on increments (thinking on the margin)

You will continue to do something as long as the marginal benefit is \___________ than the marginal cost

greater

trade-offs

ALL the alternatives that we give up when we make a choice

Opportunity cost

most desirable alternative given up when you make a choice

Utility

satisfaction

Marginal

additional

Allocate

distribute

Price

Amount buyer (or consumer) pays

Cost

Amount a seller pays to produce a good

Investment

the money spent by BUSINESSES to improve their production

Consumer goods

created for direct consumption (ex: pizza)

Capital goods

created for indirect consumption (ex: oven)

Factors of production

Land, labor, capital, entrepreneurship

Land

All human resources that are used to produce goods and services

Labor

Any effort a person devotes to a task for which that person is paid

Capital types

Physical and human

Physical capital

any human-made resource that is used to create other goods and services

Human capital

any skills or knowledge gained by a worker through education or experience

Entrepreneurship

ambitious leaders that combine the other factors of production to create goods and services

What do entrepreneurs do?

Take the initiative, innovate, and act as risk bearers to obtain profit

Profit

Revenue - costs

Productivity

A measure of efficiency that shows the number of outputs per unit of input (allows more production with fewer resources) (ex: 10 pizzas / hour)

Why do businesses and countries want to improve their productivity?

Since all resources are scarce, improving productivity allows us to produce more stuff with fewer resources.

Production Possibilities Curve/Frontier (PPC)

A model that shows alternative ways that an economy can use its scarce resources.

What does the PPC demonstrate?

scarcity, trade-offs, opportunity costs, and efficiency

Four Key Assumptions (PPC)

Only two goods can be produced, full employment of resources, fixed resources, fixed technology

Ceteris Paribus

Fixed resources. "All other things held constant"

Production Possibilities Table

Each point represents a specific combination of goods that can be produced given full employment of resources. Can be plotted as a PPC.

Efficient resources are....

on the line (Points A, B, C)

Inefficient resources/unemployment are...

below the line (Point D)

Impossible/unattainable given current resources are...

above the line (Point E)

Opportunity Cost using a PPC

If you're going down letters, use the y axis. If you're going up letters, use the x axis. Whatever the difference is, that is opportunity cost.

Constant Opportunity Cost

Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Result is a bowed out (concave) PPC

Why is the law of increasing opportunity cost true?

resources are NOT easily adaptable to producing both goods.

3 Shifters of the PPC

Change in resource quantity or quality, Change in technology, Change in trade

Capital goods and future growth

Countries that produce more capital goods will have more growth in the future

Does a change in demand shift the PPC?

NO!

Why do people trade?

Everyone specializes in the production of goods and services and trades with others. More access to trade means more choices and a higher standard of living.

Per Unit Opportunity Cost

Opportunity Cost/Units Gained

Absolute Advantage

The producer that can produce the most output or requires the least amount of inputs (resources)

Comparative Advantage

The producer with the lowest opportunity cost

Countries should trade if they have a relatively (higher/lower) opportunity cost

lower

Countries should specialize in the good that is...

cheaper for them to produce (the one they have a comparative advantage in)

Calculating Comparative Advantage for Output Questions

OOO \= Output: Other goes over

Calculating Comparative Advantage for Input Questions

IOU \= Input: Other goes under

Terms of trade

The agreed upon conditions that would benefit both countries in trade. Both countries can benefit from trade if they each have relatively lower opportunity costs.